As statistics indicate that more than 60% of the Chinese stocks listed in US suffer from low trading volume and low valuation. Apparently, their business are not as attractive as business of BIDU, SINA or SOHU. But when a new company launches US stock market, the only way that American investors can learn about this new stock is from news. Without doubt, companies with extraordinary great potential meanwhile having good reputation in China will try to hire best investment banks and arouse  as much as attention they can from US investors. But for the investors who are willing to bear high risk to invest in the IPO companies that hasn’t been well advertised is there any other method that we can tell the differences between the good and bad companies at the beginning of IPO? Yes, we do. We can tell the differences from the purposes of the companies coming to US.  How can we know the specific purpose? By exam the way how the company goes public.

Companies like BIDU, SINA, SOHU, and recently going public companies, such as RENN, YOKU, DANG, hire top investment banks and auditing companies as their partner to help their IPO. The huge build-up event before launching IPO attracts a lot attention. The ability and the courage to bear so many attentions worldwide indicate the great quality of the companies. While not all the companies coming to US are willing to spend much more money on the brokers, rather, they choose a cheaper but also convenient way to go public——reverse merger.

As Barrons indicated last December, the median performance of reverse-merged China stocks was 75% worse than the Halter USX China Index, an index of U.S. –listed Chinese companies. The majority of them are penny stock, and the return has been flat for months. The median stock in the group lost 1.7%. By comparison, the Halter Index has gained about 12% since August. The Nasdaq and the Russell 2000 have gained about 25%.[1]

What is reverse merger? Why companies choose reverse merger to IPO?

Reverse merger is also known as reverse takeover. According to the investopedia[2], A reverse merger is when a private company becomes a public company by purchasing control of the public company. The shareholders of the private company usually receive large amounts of ownership in the public company and control of its board of directors (B of D). Once this is complete, the private and public companies merge into one publicly traded company. Read on to find out how investors can profit from these situations by understanding the risks and drawbacks.

Advantages of Reverse Mergers
The following are the many advantages to performing reverse mergers.

• The ability for a private company to become public for a lower cost and in less time than with an initial public offering (IPO). When a company plans to go public through an IPO, the process can take a year or more to complete. This can cost the company money and time. With a reverse merger, a private company can go public in as little as 30 days. 
• Public companies have higher valuations compared with private companies. Some of the reasons for this include: greater liquidity, increased transparency and publicity, and they have a faster growth rates compared to private companies. 
• Reverse mergers are less likely to be canceled or put on hold because of the adverse effects of current market conditions. This means that if the equity markets are performing poorly or there is unfavorable publicity surrounding the IPO, underwriters can pull the offering off the table.
• The public company can offer a tax shelter to the private company. In many cases, the public company has taken a series of losses. A percentage of the losses can be carried forward and applied to future income. By merging the private and public company, it is possible to protect a percentage of the merged company’s profits from future taxes.

Disadvantages of Reverse Mergers
The following are the disadvantages of a reverse merger:

• Some reverse mergers come with unseen circumstances, such as liability lawsuits and sloppy record keeping.
• Reverse stock splits are very common with reverse mergers and can significantly reduce the number of shares owned by stockholders.
• Many chief executive officers (CEOs) of privately traded companies have little or no experience running a publicly traded company.
• Many reverse mergers do little of what is promised and the company ends up trading on the OTC bulletin board and providing shareholders with little to no additional value or liquidity.

Signals of Reverse Mergers
The following are potential signals that you can use to find you own reverse merger candidates:

• Appropriate capitalization. Generally, reverse mergers succeed for companies that don’t need the capital right away. Normally, a successful publicly traded company will have at least sales of $20 million and $2 million in cash.
• The best companies for a possible reverse merger are those that are looking to raise $500,000 or more as working capital. Some good examples of successful reverse mergers include: Armand Hammer successfully merging into Occidental Petroleum (NYSE:OXY), Ted Turner’s completion of a reverse merger with Rice Broadcasting to form Turner Broadcasting, and Muriel Seibert taking her brokerage firm public by merging with J. Michaels, a furniture company in Brooklyn

The following is the table exhibits all the Chinese companies went to public in US by reverse merger.  It is clear that many of them are traded in less regulated stock exchanges such as the Pink Sheets, the OTC Bulletin Board and NYSE AMEX. As the explanation mentioned above, companies going public by reverse merger usually don’t need to be strictly scrutinized by the SEC. Therefore, these companies have higher possibility to generate accounting scandal. As it reported, Nasdaq and NYSE Euronext halted trading in the shares of at least 21 small- and micro-cap Chinese companies in 2010. Five such companies were altogether kicked off of the exchanges. As it mentioned before, China is undergoing its financial reform, all the market participants, including investors, companies and the regulation authorities are on the way to be mature. In terms of listed companies, it takes time for them to seriously aware the importance of the reputation and long-term development. The frequent scandals indicate that these companies still use “Chinese style” —-always preferring to backdoor, to do business with the world.

Besides the way these companies going public, we can also select Chinese stock by looking at their financial reports, which tells about the business. If the company hires formal accounting firm to audit the reports, such as Big Four, their financial reports can be 100% trusted. On the hand, according to rule of thumb, the numbers in the reports might be somewhat inflated.

Chinese people enter the world with Chinese logic and social work philosophy, which are entirely different from what of the western world.  Since the invest objects are still immature, Chinese equity investors need to do more homework about the stocks and the companies, not only about the intrinsic value of the companies, but also about the culture background of Chinese business. We are not advocating the typical financial accounting disorder, but investing in Chinese equity with Chinese logic, especially when many Chinese business men who were born and educated in China start to evolve in the international business but have not much sense about the international rule. Not all the Chinese companies have problems in the accounting issue, and there are still many companies with great growth potential launch the US market with a poor start, that is we can still earn high returns from the companies with most promising emerging market. Even John Paulson, who earned billions of dollars in the crisis, suffered from huge loss because of wrong judgments of Sino-forest. Lesson from him ask us to do more homework about these companies from mysterious countries.

 NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ), the two biggest operators of U.S. equity markets, say the following companies are based in China and gained listings on U.S. exchanges after conducting reverse mergers, in which a publicly traded shell corporation is purchased. Stocks that have been delisted from the Nasdaq Stock Market, NYSE Amex or New York Stock Exchange have been omitted. (Corrects story published June 22 to remove ChinaCast Education.) [3]

NAME                                      TICKER       EXCHANGE

AgFeed Industries                         FEED US      Nasdaq

American Lorain                            ALN US      NYSE Amex

Aoxing Pharmaceutical                      AXN US      NYSE Amex

A-Power Energy Generation Systems         APWR US      Nasdaq

AutoChina International                   AUTC US      Nasdaq

China Armco Metals                        CNAM US      NYSE Amex

China Auto Logistics                      CALI US      Nasdaq

China Automotive Systems                  CAAS US      Nasdaq

China BAK Battery                         CBAK US      Nasdaq

China Biologic Products                   CBPO US      Nasdaq

China Botanic Pharmaceutical               CBP US      NYSE Amex

China Cablecom Holdings                   CABL US      Nasdaq

China Ceramics                            CCCL US      Nasdaq

China Fire & Security Group               CFSG US      Nasdaq

China GengSheng Minerals                  CHGS US      NYSE Amex

China HGS Real Estate                     HGSH US      Nasdaq

China Housing & Land Development          CHLN US      Nasdaq

China Information Technology              CNIT US      Nasdaq

China Infrastructure Investment           CIIC US      Nasdaq

China Jo-Jo Drugstores                    CJJD US      Nasdaq

China Marine Food Group                   CMFO US      NYSE Amex

China Natural Gas                         CHNG US      Nasdaq

China North East Petroleum Holdings        NEP US      NYSE Amex

China Nutrifruit Group                    CNGL US      NYSE Amex

China Pharma Holdings                     CPHI US      NYSE Amex

China Recycling Energy                    CREG US      Nasdaq

China Ritar Power                         CRTP US      Nasdaq

China Shen Zhou Mining & Resources         SHZ US      NYSE Amex

China Shengda Packaging Group             CPGI US      Nasdaq

China Shenghuo Pharmaceutical Holdings     KUN US      NYSE Amex

China Sky One Medical                     CSKI US      Nasdaq

China TransInfo Technology                CTFO US      Nasdaq

China Valves Technology                   CVVT US      Nasdaq

China XD Plastics                         CXDC US      Nasdaq

China Yida Holdings                       CNYD US      Nasdaq

China-Biotics                             CHBT US      Nasdaq

ChinaNet Online Holdings                  CNET US      Nasdaq

Cleantech Solutions International         CLNT US      Nasdaq

Cogo Group                                COGO US      Nasdaq

Deer Consumer Products                    DEER US      Nasdaq

Ever-Glory International Group             EVK US      NYSE Amex

Feihe International                        ADY US      NYSE

General Steel Holdings                     GSI US      NYSE

Guanwei Recycling                         GPRC US      Nasdaq

Gulf Resources                            GFRE US      Nasdaq

Harbin Electric                           HRBN US      Nasdaq

Highpower International                    HPJ US      Nasdaq

Hollysys Automation Technologies          HOLI US      Nasdaq

Jiangbo Pharmaceuticals                   JGBO US      Nasdaq

Jingwei International                     JNGW US      Nasdaq

Kandi Technologies                        KNDI US      Nasdaq

Keyuan Petrochemicals                     KEYP US      Nasdaq

Kingold Jewelry                           KGJI US      Nasdaq

Longwei Petroleum Investment Holding       LPH US      NYSE Amex

New Energy Systems Group                  NEWN US      NYSE Amex

NF Energy Saving                          NFEC US      Nasdaq

NIVS IntelliMedia Technology Group         NIV US      NYSE Amex

Orient Paper                               ONP US      NYSE Amex

Origin Agritech                           SEED US      Nasdaq

Orsus Xelent Technologies                  ORS US      NYSE Amex

Puda Coal                                 PUDA US      NYSE Amex

QKL Stores                                QKLS US      Nasdaq

Shengkai Innovations                      VALV US      Nasdaq

Shiner International                      BEST US      Nasdaq

Sinohub                                   SIHI US      NYSE Amex

Sinovac Biotech                            SVA US      Nasdaq

SkyPeople Fruit Juice                      SPU US      Nasdaq

Skystar Bio-Pharmaceutical                SKBI US      Nasdaq

SmartHeat                                 HEAT US      Nasdaq

SORL Auto Parts                           SORL US      Nasdaq

Sutor Technology Group                    SUTR US      Nasdaq

Telestone Technologies                    TSTC US      Nasdaq

THT Heat Transfer Technology              THTI US      Nasdaq

Tianyin Pharmaceutical                     TPI US      NYSE Amex

Tiens Biotech Group                        TBV US      NYSE Amex

Winner Medical Group                      WWIN US      Nasdaq

Wonder Auto Technology                    WATG US      Nasdaq

Wuhan General Group China                 WUHN US      Nasdaq

Yongye International                      YONG US      Nasdaq

Yucheng Technologies                      YTEC US      Nasdaq

Yuhe International                        YUII US      Nasdaq

Zhongpin                                  HOGS US      Nasdaq

Zoom Technologies                         ZOOM US      Nasda